Tuesday, September 18, 2012

Iraq’s Central And Regional Governments Reach Third Oil Deal, But Will It Last?

In September 2012, Baghdad and Irbil announced that they had
come to a new agreement over Kurdish oil exports. The Kurdistan Regional
Government (KRG) halted their petroleum shipments in April over a payment
dispute with the central government. It then started them again in August
hoping that would lead to a new deal, which has now happened. There are two
important and unresolved issues however. The first is whether the Kurds can
meet their quotas, because they weren’t able to do so the last time they exported.
The second is whether Baghdad can be counted on to consistently distribute
funds to the energy companies working in Kurdistan, which was the issue that
led the last two deals to break down. Both of those are likely to come up
again, making this latest agreement, perhaps just as short term as the others.

In mid-September 2012, Baghdad and Kurdistan negotiated a
new export deal. This came as a result of a meeting headed by Deputy Premier
Rowsch Nouri Shaways that included Finance Minister Rafi Issawi, Trade Minister
Khayrulla Hassan Babakir, Oil Minister Abdul Karim Luaibi, the head of the
Board of Supreme Audit, and KRG Natural Resource Minister Ashti Hawrami. The two sides came to a five-part agreement. First, the Kurds said they would
export 140,000 barrels a day for the rest of September, and then increase that
amount to 200,000 barrels for the rest of the year. Second, Baghdad would pay companies operating in Kurdistan $833 million. Third, the two would work
out an export quota and payments to be included in the 2013 budget. Fourth,
Baghdad would provide 17% of refined oil products and 17% of fuel to the KRG
for its power stations. Finally, two committees would be formed to keep track
of production, remunerations, oversee the agreement, and try to resolve any
problems that might arise. These were all issues that led to the breakdown of
the last deal between the two. The Kurds for instance, accused Baghdad of cuttings its fuel shipments. Now the central and regional governments have
supposedly worked out their differences. It also has two mechanisms to try to
problem solve any issues that may come up this time around. This move was
widely hailed in the press.

The new agreement was the result of the breakdown of the
last one. On April 1, Kurdistan halted its exports, claiming that Baghdad
owed companies there $1.5 billion. Kurdish officials told the press that firms
in the region had not been paid for their exports from 2009 and 2011. The central government countered that the KRG never provided invoices for its exports to be audited, so that payments could be made. Four months later on
August 7, the Kurds’ Natural Resource Ministry restarted sending oil through
the northern pipeline to Turkey, hoping that it would lead to a breakthrough
with Prime Minister Nouri al-Maliki. At the time, the KRG was coming under
increasing pressure from oil companies there over money. Norway’s DNO for
instance, reported a loss in August, and that it had to ramp down production at
the Tawke field in Dohuk, because it could not export. The few companies
that produce oil in Kurdistan only make small amounts of cash either from
selling to the domestic market there or through smuggling to Turkey and Iran,
both of which pay below international prices. Having a deal with Baghdad only
covers costs, but that is still more than they are currently being paid. This
was the second time that relations between Baghdad and Irbil had broken down,
so businesses were pushing Kurdistan to come to a firmer and longer lasting
agreement with Maliki’s government, so that they could earn a steady income
from their large investments in the KRG. It was for these reasons that the
Natural Resource Ministry re-started exports in August. The problem is that
there is no guarantee that Baghdad will keep up their payments, because they
haven’t in the past. That could bring down this new deal just like it did the
last two.

This is the third time that the central and regional
governments have cut a deal over oil. In 2009, it only took three months for the first one to fall apart over Baghdad not paying companies in
Kurdistan. The second one lasted fourteen months, but then disintegrated over
the same issue. There is no reason to believe that this latest one will be any
different. The Maliki government has never objected to the Kurds exporting
petroleum through the northern pipelines as long as profits are deposited in
the central bank. That’s because it gives them control over the dispersal of
the money, and allows it to claim that all energy deals have to go through it.
The problems are that the KRG has not been able to maintain its quotas, which
then draws criticism from Baghdad, and the central government has not kept up
its payments. Both issues could be caused by a lack of capacity or political
decisions to protest the actions of the other. With oil production and exports
taking off in southern Iraq, that gives an added incentive for Premier Maliki
to just stick to short-term deals with the Kurds, which can be quickly ended.
It gives the central government the upper hand in its long-standing disputes
over oil policy since it controls the purse and the pipelines to foreign
markets. Rather than a solution, this new deal is likely just one of many that
will fall apart, and then have to be re-negotiated in the future.

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About Me

Musings On Iraq was started in 2008 to explain the political, economic, security and cultural situation in Iraq via original articles and interviews. If you wish to contact me personally my email is: motown67@aol.com